aggregate demand Flashcards
what is an aggregate demand curve
the relationship between the level of aggregate demand and the overall price level - shows a measure of spending at any given possible overall price level.
what does the aggregate demand curve show
the total amount of goods and services demanded in an economy at any given level of prices
what is the relationship on the aggregate demand curve
the total amount of goods and services and the overall price level
what is on the x - axis on the aggregate demand curve
real output
what is on the y - axis on the aggregate demand curve
price level
what does a low overall price mean
high consumption (ceteris paribus)
what is the real balance effect
an effect by which an increase in the average price level reduces purchasing power and thus the quantity of real output demand
what does a change in the overall price level mean
it induces movement along the demand curve
what does a change in the components of aggregate demand mean
will result in a shift of the curve
what is the aggregate demand curve equation
C + I + G + (X-M)
what does C mean in the aggregate demand curve equation
consumption - over half of aggregate demand
what does I mean in the aggregate demand curve equation
investment - production of goods used to create other goods which allows components to grow
what does G mean in the aggregate demand curve equation
government spending - spent on things everyone benefits from which can have the positive multiplier effect.
what does (X-M) mean in the aggregate demand curve equation
net exports - the difference between exports and imports - exports can boost AD and imports detract from AD.
what does aggregate demand show
what’s driving spending in the economy
what kind of relationship is there between price level and real GDP
an inverse relationship
what is aggregate demand a measure of
a measure of spending (total expenditure)
what are the three reasons the aggregate demand curve is sloped downwards
- Wealth effect (c)
- Trade effect (X-M)
- Interest effect CIY,(X-M)
what is the Wealth effect (C)
as price level decreases the purchasing power increases (people are richer) so they spend more, increasing C
what is the Trade effect (X-M)
as the price level decreases exports become more competitive and imports become less competitive so there is greater demand for exports and they generate more revenue increasing X and opposite for imports decreasing M
what is the Interest effect CIY,(X-M)
as the price level decreases, interest rates can be kept lower stimulating higher consumption, investment which reduces exchange rates and can boost net exports.
what is the factor that always changes and affects why the curve slopes downwards
price level
when does AD shift
when C,I,G OR (X-M) change independent of the price level
